We Found a Bubble—but It May Not Be What You Think It Is
The New Year’s Eve Champagne has been imbibed, but concerns about bubbles will persist well into 2021.
There wasn’t much to celebrate in 2020, a miserable year for the economy and humanity in general. At least there was the stock market. Despite the Covid-19 pandemic, which ground the U.S. economy to a halt, the Dow and the rest of the major indexes finished the year at or near record highs. As is so often the case when there is a wide chasm between stock market gains and economic pain, many investors start to wonder if we’ve witnessed a massive financial bubble.
There’s certainly evidence for such a view, if that’s your inclination. Like the cartoon Tasmanian devil—hungry all the time and leaving a path of destruction behind it—investors have chased the newest new thing ever higher. QuantumScape (ticker: QS), virtually unknown just a few months ago, has gained 745% since announcing it would go public via a special purpose acquisition company in September, if the SPAC’s gains are counted. Chinese electric-vehicle maker NIO (NIO) saw its share price increase more than tenfold in 2020. And then there were the hot new offerings Airbnb (ABNB) and DoorDash (DASH), which gained 116% and 40%, respectively, since going public in December, and made investors scream “Bubble!” like the dot-com era all over again.
“We aren’t in that euphoric-moment bubble territory just yet,” says Michael Arone, chief investment strategist for the US SPDR Business at State Street Global Advisors. “But there are certainly red flags to suggest we could be heading there.”
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